As we navigate through uncertain financial times, it’s crucial to address the elephant in the room—cash. At the moment, investors are sitting on record amounts of cash, but the real question is, what should you do with it?
Let’s start by determining how much cash you really need. Typically, the average American should have around $24,000 in cash, plus additional funds for major expenses. However, if you’re more risk-averse, consider building a six-month emergency fund, or even nine months if your income fluctuates.
It’s important to remember that holding excess cash comes with a cost. Not only does it lose value due to inflation, but you’re also missing out on potential market gains. The historical difference in yields between cash and stocks is stark, highlighting the benefits of investing wisely.
Now, let’s address the crux of the matter—what should you do with the excess cash you have? Consider making lump sum deposits into investment options. While this approach may feel like taking a leap of faith, studies show that investing a lump sum often results in better returns over the long term.
Vanguard’s research suggests that nearly three-quarters of the time, making a lump sum deposit outperforms gradual investments over six months. This strategy could help you maximize your returns and grow your wealth effectively.
While dollar-cost averaging (DCA) is suitable for regular cash flow investments, diving in with a lump sum makes sense when you have surplus funds at your disposal. By combining both strategies, you can make the most of your savings and work towards your long-term financial goals.
